Conduit borrowers act as third-party lenders, assuming debt and providing securities loans to customers who don’t meet original lender’s credit requirements. They negotiate terms and conditions with customers, but bear full liability to the original lender for repayment of the loan. Using a conduit borrower is common, but should only be used after investigating all other legitimate means of obtaining a loan.
Conduit borrowers are essentially individuals or corporate entities who take on debt to secure a loan to a third party. Essentially, the conduit borrower acts as a third-party lender and normally makes a profit for the effort. By assuming debt and providing a securities loan to customers who do not meet the original lender’s credit requirements, the conduit borrower assumes full responsibility for repaying the original loan.
The concept of the led borrower can be illustrated by considering the process as an intermediary between an entity needing a loan and a lender providing loans. When factors make it impossible for the borrower to directly secure the loan, the borrower may step in to act as a conduit or conduit between the two parties. In exchange for guaranteeing the loan, the conduit borrower will negotiate terms and conditions with their customer that are acceptable to both the conduit borrower and the loan recipient. This generally means that the customer of the conduit borrower will pay a higher rate of interest. However, if the customer lacks credentials to secure a loan without the use of a borrower, this may be considered the most efficient means of obtaining the loan.
It should be noted that the conduit borrower bears full liability to the original lender for repayment of the loan. Even if the conduit borrower’s customer defaults, the borrower is still liable for payments on the original loan under the terms and conditions. Naturally, the led borrower may choose to use legal means to recover all or part of the outstanding balance owed. However, payments to the original lender must continue during this collection process.
While using a conduit borrower is common, the option should not be employed until all other legitimate means of obtaining a loan have been investigated. While the interest rate charged by a conduit borrower may be competitive with rates obtained by high-risk loan companies, this is not always the case. Any individual or entity wishing to borrow funds should thoroughly investigate all options before making a final application to a conduit borrower.
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